question : childrens toy company sensitivity analysis ( c/s ratio)

Cchicababes199111y ago

hi i am currently having difficulties in part b ii question childrens toy company the question goes like that calculate the minimum target contribution to sales ratio at which nellie the elephant will be financially viable, assuming that all other data remain unchanged to my understanding this is sensitivity analysis the formulae is NPV / PV of cash flows affected i am having difficulties in understanding which PV of cash flows is affected since it says contribution to sales ratio i know contribution to sales ratio there is contribution involved that might be affected and there is sales figure which i can calculate the PV and put in the formulae how am i suppose to know which one to take? either the contribution PV or the sales PV? i would appreciate if someone could kindly help me out please

kengarrettTutor11y ago#1

No. In this part of the question, the sales revenue stays the same, but the contribution earned from each $1 sale has to incease from $0.5 to a higher figure to eradicate the initial negative NPV. Here's the ACCA working: Let X = the change in the contribution to sales ratio (%) For Nellie the Elephant to become financially viable, an increase in the contribution to sales ratio (%) is required [to eliminate the negative NPV of $426,932. This can be calculated as follows: (4 x X x 0·893) + (9 x X x 0·797) + (5 x X x 0·712) = 0·426932 i.e 3·572X + 7·173X + 3·56X = 0·426932 [Note in the first term 4 x X x 0.893, 4 is the first year sales X is the increase in C/S, 0.893 is the discount factor similarly for other terms] ? 14·305X = 0·426932 ? X = 0·02985 This means that the required contribution to sales ratio (%) = 0·50 + 0·02985 = 0·52985 or 52·985%. This would result in a net present value = 0.

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